Mr. Seamus Coffey:

We are straying far outside our mandate in respect of comments on interest rates. We address interest rate expectations because the Government has a large debt linked to interest rates. It is not just a household problem. I am not sure there is a general view in Ireland, particularly for new borrowers, that interest rates are low compared with other EU countries. Compared with the 14% or 15% rate that existed in the past, Ireland has relatively high borrowing costs for new borrowers. Interest rates may have been 14% or 15% for previous generations but inflation was a substantial feature of economic life at the time, with rates of 10%, 12% or 14%. While there were many moving parts, the changes to real income might not have been as dramatic. Moves over recent decades have been to curb inflation, to give independence to central banks and try to drag down inflation expectations. Perhaps over the past decade that process has been too successful. One reason for our low interest rate is that inflation is so low. That looks like being so for the coming years.

Government debts, which to all intents and purposes look out possibly to an infinite horizon, are not being eroded by inflation. Their value in real terms is being maintained. To someone looking at it from the perspective of today, the mortgage on which the Vice Chairman was paying a rate of 14% or 15% would appear tiny because of the impact of inflation. The debt for a household with a mortgage, and a Government with a substantial public debt of €200 billion, will not be reduced in real terms to the same extent due to the success in curbing inflation over recent decades. Inflation is viewed as a negative factor because it adds to uncertainty, has an impact on investment decisions and the mantra of low and stable inflation has taken hold but the trade-off between inflation and interest is not at the high level it was in the past.